Since some of the materials which describe the $cientology cult could be considered to be

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considered to be copywritten materials, I have censored myself and The
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95 TNT 123-8 (JUNE 26, 1995)
* * * * * * * * * * * * * * * * *
News Stories (NEW)
* * * * * * * * * * * * * * * * *
DETAILS OF SCIENTOLOGY CLOSING AGREEMENT SLOWLY COMING OUT.
HIGHLIGHT:
Following the recognition by the IRS of the tax-exempt status of
numerous Scientology organizations on October 1, 1993, Tax Analysts,
in a Freedom of Information Act request dated November 10, 1993,
sought the underlying closing agreement, contending that it was part
of the administrative record in these cases and hence subject to
disclosure under section 6104. The IRS denied the request, contending
that the closing agreement contained return information not subject
to disclosure under section 6103.
Tax Analysts then filed suit in the U.S. District Court for the
District of Columbia, seeking release of the closing agreement and
all other closing agreements pertaining to exempt organizations since
December 31, 1992. In response to interrogatories, Jonathan Jackel,
who is the trial attorney with the Tax Division of the Department of
Justice assigned to the case, did lay out what appears to be the
government's main defense to release of the closing agreements: "All
information described by plaintiff that is not available to the
public by virtue of I.R.C. sections 6104 or 6110 is confidential
return information under section 6103|."
Section 6103 provides that "returns and return information shall
be confidential." Section 6104, however, provides for the public
disclosure of information submitted to the IRS by tax-exempt
organizations. Hence, one of Tax Analysts's arguments is: If the IRS
agreed to recognize Scientology organizations as tax-exempt under a
closing agreement, should that agreement not be subject to public
disclosure under section 6104? The Service, perhaps recognizing the
logic of that argument, has forcefully asserted that even though the
exemption rulings followed the closing agreement, the agreement did
not serve as the basis for the rulings. However, the off-track
processing by the Service in advance of, and after, the final
"formal" exemption applications were filed leaves that assertion
unsupported.
AUTHOR(s): Streckfus, Paul
CORPORATE SOURCE: Tax Analysts
TEXT:
Following the recognition by the IRS of the tax-exempt status of
numerous Scientology organizations on October 1, 1993, Tax Analysts,
in a Freedom of Information Act request dated November 10, 1993,
sought the underlying closing agreement, contending that it was part
of the administrative record in these cases and hence subject to
disclosure under section 6104. The IRS denied the request, contending
that the closing agreement contained return information not subject
to disclosure under section 6103.
Tax Analysts then filed suit in the U.S. District Court for the
District of Columbia, seeking release of the closing agreement and
all other closing agreements pertaining to exempt organizations since
December 31, 1992. In response to interrogatories, Jonathan Jackel,
who is the trial attorney with the Tax Division of the Department of
Justice assigned to the case, did lay out what appears to be the
government's main defense to release of the closing agreements: "All
information described by plaintiff that is not available to the
public by virtue of I.R.C. sections 6104 or 6110 is confidential
return information under section 6103|."
Section 6103 provides that "returns and return information shall
be confidential." Section 6104, however, provides for the public
disclosure of information submitted to the IRS by tax-exempt
organizations. Hence, one of Tax Analysts's arguments is: If the IRS
agreed to recognize Scientology organizations as tax-exempt under a
closing agreement, should that agreement not be subject to public
disclosure under section 6104? The Service, perhaps recognizing the
logic of that argument, has forcefully asserted that even though the
exemption rulings followed the closing agreement, the agreement did
not serve as the basis for the rulings. However, the off-track
processing by the Service in advance of, and after, the final
"formal" exemption applications were filed leaves that assertion
unsupported.
Depositions Start Telling Story
Following the interrogatories, Tax Analysts deposed five senior
IRS officials involved in some way with the Scientology closing
agreement. "I'm not aware of any direction ever being given that told
a tax law specialist not to review an administrative file in
preparing their recommendation on a case," according to Jeanne S.
Gessay, chief of the IRS ruling branch to which the Scientology
exemption applications were assigned. Yet that was what was happening
in her branch involving tax law specialists under her supervision.
The limited scope of branch review was outlined in a file memo
prepared by tax law specialist Terrill Berkovsky in the case of the
Church of Scientology, Western United States: "The issues regarding
inurement, private benefit, public policy, and whether the
organization is involved in commercial activities have| not been
addressed in this file memorandum as the negotiation committee
involved in the closing agreement| made the determination that there
was no inurement, private benefit, or commercial activities that
would prohibit recognition of exempt status. This request to affirm
organization's exempt status was processed as part of settlement
negotiations and in accordance with special instructions from the
negotiations committee. The committee was chaired by Howard
Schoenfeld."
Yet, according to Jay Rotz, executive assistant to the director
of the IRS Exempt Organizations Division, who did review the
applications, the tax law specialists were not under instructions to
ignore issues of inurement, private benefit, and commerciality. But
he did say that "by the time the applications were submitted, it's my
understanding that those issues had been resolved at that point."
Later, Howard Schoenfeld, special assistant in the IRS Office of
Assistant Commissioner (Employee Plans and Exempt Organizations), did
confirm that directions had been given to tax law specialists in
Gessay's branch. Schoenfeld was asked: "Have you ever directed a tax
law specialist not to examine an application for such technical
issues?" referring to "inurement, private benefit and
commerciality"|. He responded in his deposition: "There came a time
when I did ask that the tax law specialist not make or consider any
substantive matters relating to an application."
At Jackel's behest, Schoenfeld did offer the following
clarification: "In the particular situation, the responsibility, the
substantive responsibility, did not belong to the tax law specialist
for making substantive decisions in the case. They were only
responsible for the procedural aspects of the case. So that's why the
request was made as it was. The responsibility for all the decisions
in the case was not the responsibilities of the persons who actually
handled and processed the case for procedural purposes."
James J. McGovern, the current assistant commissioner (EP/EO),
testified in the same vein. He was asked: "Did the negotiations
committee issue special instructions regarding the processing of the
Scientology exemption| applications which ultimately led to the
issuance of the favorable exemption| ruling letters?" McGovern
responded: "They the people who normally process ruling letters|
were advised that those matters technical issues| had been reviewed
and a decision has been made with respect to them." He was then
asked: "Prior to those applications being received by the tax law
specialists?" In what appears to be a significant admission, McGovern
answered affirmatively.
Who Signed for Whom?
Gessay admitted that the exemption rulings to the Church of
Scientology had her signature on them, but she said she had no
responsibility for their review and took no part in the review
process. Instead, responsibility rested with Rotz.
Rotz confirmed that he had signed for Gessay, but could not
recall if the assistant commissioner (EP/EO) signed off on those
ruling letters. Nor was Rotz familiar with the closing agreement with
the Scientologists. He explained that his role was strictly
procedural, that the applications had been "physically handed" to him
by Schoenfeld, and that he had received special instructions.
Asked if the Scientology applications had been "considered and
reviewed in accordance with these typical procedures," Rotz said no.
Instead, he admitted that special procedures were adopted for the
handling of the Scientology applications.
Interestingly, the EO Division director, Marc Owens, who is
Rotz's immediate superior, was recused from the processing of the
Scientology applications. When asked if he was "aware of how your
division handled and processed the applications submitted by the
Scientology applicants," he answered no.
Schoenfeld did admit to signing off on the ruling letters, along
with the entire negotiating committee. He admitted that the major
decisions were made by the negotiating committee: "I just want to
reiterate that the decisions, or the substantive decisions, were by
the negotiating committee, including me -- myself -- as to all
matters of substance in the handling of the exemption applications."
But Schoenfeld would not respond to queries whether there was any
White House or Treasury Department contact or correspondence
regarding the applications.
Schoenfeld conceded that the processing that occurred in the
exempt organizations division was strictly procedural, not
substantive: " The tax law specialists were| to prepare the ruling
letters to insure that they would satisfy all the procedural
requirements that were necessary and outstanding at that time." The
tax law specialists were not to evaluate the Scientology applications
for issues of inurement or "any other substantive issues," including
issues of private benefit and commerciality. They were so advised on
his authority, he admitted.
Decision Time at Issue
The IRS contends that the decision to grant exemption to the
Scientologists was made after August 30, 1993, when it appears that
the actual decision to grant exemption must have been made before
that date -- as part of the closing agreement with the
Scientologists. When asked about the IRS review of the Scientology
applications, Schoenfeld at least admitted there was some pre-August
30, 1993, information on which the IRS relied: "That review took
place at the time of the receipt of the exemption applications and
including times prior to the receipt of those exemption applications
when matters relating to tax-exempt status and other issues were
under consideration by the Internal Revenue Service." McGovern said
the technical review was a two-year process, which obviously exceeded
the six weeks from receipt of the final exemption applications
(August 18, 1993) to issuance of the favorable exemption rulings
(October 1, 1993). Two years, on the other hand, does match the time
the negotiating committee was in existence.
But Schoenfeld would not, on advice of counsel, answer whether
any of the Scientology applicants were asked to enter into a closing
agreement as a condition precedent to the issuance of a favorable
letter ruling. Such an admission would strongly suggest that the
decision to grant exempt status had been made before August 30, 1993
-- that is, two weeks after receipt of exemption applications -- and
support release of the closing agreement under section 6104.
The government's defense is to refuse to answer questions
pertaining to the closing agreement on the basis that section 6103
compels IRS silence. "I'm going to object and instruct the witness
not to answer questions about negotiations between Scientology and
the Internal Revenue Service," was a familiar objection voiced by
Jackel.
Section 6103
The government is also taking an expansive view of section 6103,
which pertains to "returns and return information," defined in
section 6103(b)(2). IRS counsel Margo Stevens seems especially
liberal in her interpretation of section 6103: "Return information is
not just having to do with a return." She was challenged by Bill
Lehrfeld, counsel for Tax Analysts: "It section 6103| has to
protect return information. If there's no return, are you| telling
me that there is return information if there is no return?"
Undeterred, Stevens replied: "Yes, that may be so."
The government is even claiming that some information in the
administrative file is covered by section 6103. In particular, the
Justice Department was surprised by the discovery in the
administrative file of a letter from then Assistant Commissioner
(EP/EO) John E. Burke to the Scientologists. In that January 1992
letter, Burke states: "You the Scientologists| indicated that you do
not want the materials submitted in the ongoing discussions to be
placed into the administrative record of any of the exemption|
applicants. While I have some concerns about that, I do not want this
procedural issue to become a stumbling block to progress in our
discussions."
Burke then goes on to make a statement that was the subject of
heated exchanges during the depositions of Schoenfeld and McGovern.
McGovern had been on the negotiating committee with Schoenfeld when
he was associate chief counsel (EB/EO). According to Burke in his
letter, "If the materials you provide sufficiently address our
questions and concerns so that we are able to issue favorable
determination letters, we will need to put at least some of that
information into an administrative record. As part of our dialogue,
we can discuss the content of the administrative records."
The statements by Burke in his letter to the Scientologists
should be contrasted with the deposition statements of Owens,
director of the EO Division -- the division with primary
responsibility for issuing exemption rulings. When asked about the
administrative record that must be made available to the public under
section 6104, Owens said under oath: "My division procedures would
require that any documents submitted by the taxpayer or their
representative, or sent by the Service to the taxpayer or their
representative, as part of the processing of the application for
exemption, would be part of the administrative file and part of the
administrative record, the public record in the case."
In particular, Owens was asked whether the following statement
in the Burke letter is consistent with his division's policies: "If
the materials you provide sufficiently address our questions and
concerns so that we're able to issue you favorable determination
letters, we will need to put at least some of that information into
an administrative record. As part of our dialogue, we can discuss the
content of the administrative records." Owens said no.
But Schoenfeld, in his deposition, said the above statement is
consistent with IRS policy. Pressed on this point, Schoenfeld, one of
the drafters of the statement, said: "Your statement contains an
absolutely erroneous premise . . . that the information requested
related only to the exemption application."
Jackel, recognizing the corner his clients were being painted
into, interjected: "I realize that temporally we have a lot of
complications here. We're talking about a letter that was written in
January of 1992, and we're talking about organizations whose
successful application for exempt status wasn't filed until after
that date."
The Key Question
Plaintiff's counsel Bruce Stern then asked Schoenfeld the
$64,000 question: "Is it your understanding that by the terms of this
letter the Internal Revenue Service would not place all materials
submitted in support of these exemption applications in their
administrative records?" Schoenfeld answered no. That may be his good
faith understanding, but it does not answer the question whether
materials were submitted in support of unsuccessful applications that
were not, but should have been, in the administrative record of the
"final" applications.
In response to a follow-up question, Schoenfeld explained, "The
Internal Revenue Service was receiving materials that, in part,
related to an exemption application matter, but also was requesting
and receiving information that related to other pending matters
before the Internal Revenue Service."
Later, after having admitted that a review of all information
before the IRS was made to determine what information needed to go in
the administrative record, Schoenfeld was asked, "Did counsel for the
Scientologists or any representatives of the Scientologists take part
in the determination as to what materials would be placed in the
administrative record subject to public review?" He responded, "The
determination was made by the Internal Revenue Service." Unaddressed
was whether such a determination was or was not in accord with the
Burke letter's statement that "As part of our dialogue, we can
discuss the content of the administrative records."
When Schoenfeld was asked about the Burke letter in this
context, Jackel cut off any response: "Well, then, you're asking him
to interpret what the law is, and that's beyond the scope of his
testimony. The question of what should have been done in a particular
case is the kind of opinion evidence that he is not authorized to
testify on. If you ask him what the procedures are, generally, that's
fine. How they apply in a particular case is, in essence, expert
testimony."
The Unanswered Question
The question of who made the final decision to recognize the
Scientologists as tax-exempt remains unanswered. When Owens was
asked, he said, "I don't know." When Schoenfeld was asked if it was
the commissioner or assistant commissioner (EP/EO), he said, "I
decline to answer."
As for the processing of the Scientology applications, it was
unusual. Asked if he was aware of any situation in which a tax law
specialist has been directed not to examine an application for issues
of inurement, private benefit, commerciality, and public purpose,
Owens said, "I'm not aware of such an instruction having been given."
(That is what happened in the Scientology cases.) Asked if it would
be unusual for a tax law specialist to receive such instructions from
his superiors, he said, "I would find that to be unusual."
Rather than defend its conduct in this controversial case, the
IRS appears to be relying on section 6103 to shield its "unusual"
actions from public scrutiny. The government's argument is a simple
one. If it disclosed information regarding the Scientology exemption
rulings in the sanitized administrative file, it is ipso facto
section 6104 information; if it did not, then it is ipso facto
section 6103 information.
A Novel Defense
Basically, the government's position appears to be that any
information not required to be made available under section 6104 is
covered by section 6103 (which, by its terms, is supposedly limited
to returns and return information). "Any information that's not
required to be disclosed under 6104 is privileged|," is the way
Jackel put it. Nevertheless, IRS officials said that IRS Form 1023 is
not a return.
The argument seems to be that the government has unfettered
discretion to decide what is privileged information (section 6103)
and what is not (section 6104). When pressed on this interpretation,
Stevens replied: "I'm not going to accept, for this discussion
here -- which I think is totally inappropriate in any event -- to
battle on the legal issues that are . . . for the court to decide."
Lehrfeld's response was, "Well, I don't know that counsel's
byplay is ever immaterial for a court's consideration. . . . The
theory of our case is that a document that is required to be
submitted during the application process, and which is required by
the National Office in advance of the issuance of a favorable ruling,
supports the exemption application and therefore is disclosable under
6104, because the ruling would not have been issued, but for the
filing of that document."
Faced with that postulation of plaintiff's position, Jackel
confirmed the government's ipso facto posture in this case: "If the
Service has not determined under the procedures of 6104 that the
document must be placed in a public file, then it is our position
that it is 6103 information." The only problem with this position, if
accepted by a court, is that it will give the IRS complete freedom to
decide what information is subject to public scrutiny and what
information is not. One would assume that the government will always
opt for the least possible amount of disclosure in every case.
The Mysterious Negotiations Committee
As for the negotiations committee, which appears to have done
the heavy lifting in the Scientology cases, the government did not
initially want to even concede its existence, until Schoenfeld, in
his deposition, faced with evidence of its existence, admitted he
served on the negotiating committee.
But Jackel would not allow Schoenfeld to explain the role of
this onetime negotiating committee: "The guidelines for the
negotiating committee| are whatever the situation dictates," was
Jackel's terse explanation. But later, McGovern, without Jackel's
objection, responded to this question: "Was the goal of the
negotiating| committee to negotiate a resolution to issues involving
the exempt status of the Church of Scientology or its affiliated
organizations?" According to McGovern, "The goal of the committee was
to address a myriad of issues of outstanding disputes between the
church and the Service, one of which was exempt status."
From a document in the administrative record, it appears that
the members of the negotiating committee were (in addition to
McGovern and Schoenfeld): Bob Gardiner (then senior projects analyst
in the office of EP/EO field compliance); Beth Purcell (assistant
branch chief in the office of the associate chief counsel (EB/EO));
and Steve Miller (then special counsel to the associate chief counsel
(EB/EO)). The problem here for the IRS, which the agency does not
want to admit, is that it appears that the negotiating committee made
a decision to recognize the exemption of approximately 25 Scientology
applicants who then submitted the "final" exemption applications,
which were then reviewed only for procedural correctness by the
exempt organizations division.
The most germane testimony on this issue was by McGovern in
response to questions asked by Stern.
Stern: "Mr. McGovern, is it typical for the IRS to make a
determination with respect to an organization's exempt status prior
to the date the organization's exemption application is filed?"
McGovern: "No."
Stern: "Are you aware of any circumstances under which the IRS
has made a determination with respect to an organization's exempt
status prior to the date its exemption application was filed?"
McGovern: "No."
Stern: "Are you aware of any situation in which the National
Office has determined that it will recognize an organization as
exempt under section 501(c)(3) prior to the date the organization's
approved exemption application (an exemption application to which a
favorable ruling was issued in response to) was filed?"
McGovern: "No."
Stern: "Just so we're clear, the IRS has never made a
determination to recognize an organization as exempt under section
501(c)(3) prior to the date the organization's approved exemption
application was filed?"
McGovern: "Not to the best of my knowledge."
What is not being differentiated is the actual decision to
recognize exemption and the pro forma decision to issue a ruling to
recognize exempt status. As noted above, the depositions strongly
support the proposition that the only review conducted in the exempt
organizations division was procedural, and that all substantive
decisions were made by the negotiating committee.
Jackel would not let Schoenfeld say who directed that the
negotiating committee be formed, although there are reports that then
Commissioner Fred Goldberg directed its formation after meeting with
Scientology representatives. Nor would Jackel let McGovern address
the question whether Goldberg directed its formation.
When Was the Decision Made?
As noted above, at issue is whether the IRS promised exemption
to Scientology organizations before the submission of the Form 1023
applications that appear in the administrative record. Schoenfeld
said no, but later he refused to answer, at the direction of counsel,
the following question: "Since 1991, has the IRS conditioned its
issuance of a 501(c)(3) ruling letter to an organization on the
organization's agreement to be bound by the terms of a previously
executed closing agreement?" Owens responded to this question by
saying, "In the cases in which I'm familiar . . ., my recollection is
that the closing agreements were necessary for purposes of arriving
at the ultimate decision in the case." His answer, however, was not
directed to the Scientology cases because Owens was not involved in
them.
McGovern would not answer, on advice of counsel, this question:
"Did the closing| agreement provide that the IRS would recognize the
Scientology applicants, or any of them, as exempt under section
501(c)(3)?" But McGovern did answer affirmatively this question:
"Through this agreement, did the IRS resolve the outstanding issues
regarding Scientology applicants' exemption applications?"
And Jackel did let Schoenfeld answer this question: "Was the
working group charged with the responsibility of determining whether
the Scientology applicants would be recognized as exempt under
section 501(c)(3)?" Schoenfeld said, "That was part of the charge."
Interestingly, McGovern's response to the same question was the same:
"That was part of the charge."
Somewhat surprisingly, in light of his previous testimony,
McGovern did answer affirmatively this question: "Since 1991, has the
IRS more than once used a closing agreement to resolve outstanding
issues regarding an organization's future exempt status?" McGovern:
"I believe so." This question is significant because an affirmative
response indicates that at least part of the closing agreement should
have been part of the administrative record in any such case. The
testimony of Schoenfeld indicates that the Scientology cases were
such cases.
The parties are preparing motions for summary judgment, due June
30.